On the Dynamic of Stock Market Integration: A Minimum Spanning Tree Analysis

  • Kusdhianto SetiawanEmail author


Stock market integration is investigated using the minimum spanning tree (MST) technique, a technique that finds minimum total distance of edges that connect vertices (markets). The distance measure is a transformed variable of cross-correlation coefficients among the market returns or indexes. Prior studies have shown that financial openness led to financial market integration and encouraged foreign capital inflows, both long-run capital such as foreign direct investment, and short-run capital in the stock markets. However, this paper found that stock markets are clustered into regional areas especially when market return in both local currency units and US Dollar values were used in estimating correlation coefficients. In addition, markets responded differently to shocks in other markets. Although the degree of integration is dynamic through the observation periods, there is trend that the markets are becoming more integrated. It is also found that stock markets became more integrated when there were economic crises or strong market shocks in a leading developed market (subprime crisis in US for instance).

Key words

capital market market integration minimum spanning tree 

JEL Classification

F3 (International Finance) G1 (general financial market) 


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Copyright information

© Japan Economic Policy Association (JEPA) 2011

Authors and Affiliations

  1. 1.Graduate School of EconomicsHiroshima University of EconomicshiroshimaJapan
  2. 2.Faculty of Economics and BusinessGadjah Mada UniversityYogyakartaIndonesia

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